Working Longer Works Better Than Saving More Money for Retirement

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Those saving for retirement would be better off working longer than just bumping up their savings rate by one percentage point, according to the authors of the new paper, The Power of Working Longer.

Delaying retirement, and working just another three to six months has the same impact on the retirement standard of living as saving an additional one-percentage point of labor earnings for 30 years, according to John Shoven, an economics professor at Stanford University, Gila Bronshtein of Cornerstone Research, Jason Scott of Financial Engines, and Sita Slavov of George Mason University.

What's more, the authors noted that "the relative power of saving more is even lower if the decision to increase saving is made later in the work life."

In other words, if you bump up how much you save for retirement by one percentage point 10 years before retirement it has the same impact on the sustainable retirement standard of living as working a single month longer -- just one single month longer.

Even more surprising is that Shoven and his co-authors examined a wide range of realized rates of returns on saving, for households with different income levels, and for singles as well as married couples and discovered that the results "are quite invariant to these circumstances."

To be fair, households that can work longer and bump up the percent they save toward retirement stand a better chance of supporting a satisfactory and sustainable standard of living in retirement. And households that can work longer; increasingly bump up the percent they save each year; invest in low-cost funds; and delay Social Security stand the best chance of achieving the retirement they desire.

But, in the scheme of things, working longer provides the biggest bang for your retirement buck. "Working longer is a powerful method to increase retirement standard of living and has a substantially larger impact on retirement consumption than other alternatives, particularly in mid- and late-career circumstances," the authors wrote.

And that, Shoven said in an interview, could give hope to mid- to late career workers who aren't saving enough and/or who haven't accumulated enough to fund their desired lifestyle in retirement. "So, say you're 46," he said. "And, you're thinking of retiring at 64. And, well, you do the projections, and you're in terrible shape. Well, if you work till 66, it'll look a lot better. And so, you'd have about 15%, 16% more income for the rest of your life if you just added those two extra years of work. So, yes, there is a way to offset the effect that you didn't save enough, namely, it's work a little more. And, we're not, I'm going to repeat, I mean we're not asking people to work till they're 80 or even till they're 70."

Indeed, said Shoven, "relatively small changes in your retirement age make a difference."

Working Longer Doesn't Always Work Out

To be fair, working longer is not a fail-safe plan. In fact, the Employee Benefit Research Institute (EBRI) has consistently found that a large percentage of retirees leave the workforce earlier than planned, including some 48% of whom who did so in 2017. According to EBRI's 2017 Retirement Confidence Survey, many retirees who retired earlier than planned cite hardships for leaving the workforce when they did, including health problems or disability (41%), changes at their company, such as downsizing or closure (26%), and having to care for a spouse or another family member (14%). And still others say changes in the skills required for their job (4%) or other work-related reasons (16%) played a role.

And Shoven, in an interview, did acknowledge that the results the study might only apply to half the population. "On the other hand, half the population is still a lot of people," he said. "But I do think the results apply to a lot of people."

Shoven also said those saving for retirement who understand that they may not be able to work longer still should increase how much they save for retirement. "If they knew that was the risk then I do think that that's a case for saving more," he said. "That is, they would be better off in that eventuality if they had been saving 10% (of their salary) or 11% instead of 9%."

But the study does suggest that working longer -- if you are able to do so -- can really change your retirement standard of living rather dramatically, said Shoven.

Retirement Planning Fraught with Uncertainty

In their research, Shoven and his co-authors noted other risks and uncertainties associated with planning for retirement. "One of the biggest financial challenges people face is allocating lifetime resources in such a way as to support a satisfactory and sustainable standard of living in retirement," they wrote. "Households can explicitly or implicitly establish a plan at a relatively early age, but there is a great deal of uncertainty about important factors such as future wage growth, asset returns, life expectancies, annuity prices and Social Security benefit formulas at the time of retirement."

In general, Shoven and his co-authors noted that key retirement-planning decisions to make include when to start saving for retirement, what percentage of earnings to contribute to employer-based tax deferred saving accounts; what asset returns and expenses to assume; and at what age to retire.

Over time, and as some of the uncertainty gets resolved, Shoven and his co-authors wrote that households should reassess and, given today's persistently low real interest rates and wage growth, consider re-optimizing their retirement strategy.

Best case, Shoven et al. suggested that households ought to continually reassess and reoptimize as new information is revealed. However, "households facing constraints on their time and attention could reexamine their plan at periodic intervals, such as every 10 years," the authors wrote.

The authors also noted that their analysis "provides valuable information to households as they consider the levers that they have at their disposal to increase their retirement standard of living."

What Else Works and What Doesn't Work

The researchers also found that using low-cost investments "diminishes with age since there are fewer years to enjoy the benefit of a lower cost portfolio."

Shoven noted, for instance, that switching from high-cost funds to low-cost funds is the same as saving 1% more. But, he noted, that saving 1% more for 10 years starting at age 56 was the equivalent of working one month longer. "Lower fees help," he said. "But, again, the story of the paper is working a little longer is very powerful."

The research also showed that delaying one's planned retirement date and delaying Social Security claiming dates to at least full retirement, age if not age 70, "continue to have the same impact on retirement living standards as a person ages.

"Claiming Social Security upon retirement is not necessarily optimal," the authors wrote. "In fact, most primary earners benefit from delaying Social Security to age 70 regardless of retirement age, and using private retirement assets to finance a delay of Social Security is superior to annuitizing them."

Benefits of Working Longer, Delaying Social Security

So why does postponing retirement and Social Security improve the sustainable standard of living retirement? According to the authors, there are several reasons:

Delayed annuity purchase results in lower annuity prices (that is, a given amount of wealth will convert to a larger monthly annuity payment).

Get the Right Advice

If you're getting or seeking financial advice about retirement, Shoven also suggested in an interview that "your adviser should help you not only with how to invest your IRA and/or 401(k) accounts, but they should help you sort through the rules of Social Security, and they should help you figure out the consequences of retiring at different ages."

For instance, if you're thinking of retiring at 64, your adviser should also examine what would happen if you retired at 65 so you can compare the two cases. What's needed, Shoven said, "holistic retirement advice, and not just financial investment advice." And the reason for that, he said, is that your biggest asset in retirement is often Social Security and using that correctly is really important. "If your financial advisor doesn't help you with that then they haven't done the whole job," said Shoven.

In Theory and in Practice

Of note, at least one academic not only agrees with the findings in The Power of Working Longer, but he's living proof that it works. "I turned 71 in December, so am also personally experiencing results, as I am still working full-time," said Sherman Hanna, a professor at Ohio State University. "I actually started thinking about this in 1987 when I started doing some calculations based on working this long, and decided to stop contributing to our retirement funds that year -- mostly in stocks so funds have continued on the upward trending roller coaster but at least the RMD is not quite as big as otherwise."